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LONDON, Nov 6 (Reuters) --- British microprocessing firm Imagination Technologies is to buy the operating business of MIPS Technologies for $60 million in a bid to step up its challenge to an increasingly dominant ARM Holdings.

Imagination, whose graphics technology is in Apple's iPhone, said on Tuesday it would gain 160 engineers and 82 patents to make it a stronger player in CPUs, the central processors in devices like routers, modems and games consoles.

It will also get a licence for a further 498 patents being sold by California-based MIPS for $350 million to a consortium of technology companies organised by patent holding company Allied Security Trust and led by ARM.

"The combined business should be able to create a new industry-leading force in CPUs, and essentially will provide choice and an alternative to our good friends in Cambridge," Imagination chief executive Hossein Yassaie told Reuters, referring to ARM.

MIPS was a pioneer of 32-bit and 64-bit processing, and its technology is in blu-ray players, digital televisions and video games consoles such as the Sony PlayStation 2.

But it has failed to make headway in smartphones, where chips based on ARM's architecture dominate. ARM has also made inroads into the microcontroller market, where chips sell for less than $1 to control toys, power tools and appliances.

MIPS lost its way five or six years ago when it diversified into analogue technology, but under new management has developed products that looked exciting, Yassaie said.

Some 700 million chips based on MIPS technology were shipped in the 12 months ended June, helping generate about $60 million in revenue. MIPS made a loss before tax of about $9 million.

Yassaie said chipmakers such as Broadcom wanted a choice of competing architectures, adding that one of MIPS selling points was that it was directly supported by Google's Android operating system for smartphones and tablets.

DEFENSIVE MOVE

Shares in Imagination, which counts Apple and Intel as investors, were up 0.6 percent to 467 pence by 1430 GMT, valuing the company at about 1.2 billion pounds.

"We see this as a defensive move to meet the challenge of ARM, which has eaten into Imagination's core PowerVR graphics chip market," said FinnCap analyst Lorne Daniel.

Numis analyst Nick James said the momentum was with ARM, whose technology had become pervasive across the semiconductor market over the last five years or so.

ARM is contributing $167.5 million of the $350 million to buy the rights to the 498 MIPS patents.

ARM chief executive Warren East said that deal removed any potential infringement risk from these patents in the further development of advanced embedded technology.

"Litigation is expensive and time-consuming and, in this case, a collective approach with other major industry players was the best way to remove that risk," he said.

ARM's shares hit a 12-year high of 735.5 pence in morning trade. It was also buoyed by reports that Apple could replace Intel chips with ARM-based ones in its Mac computers.

MIPS shareholders would receive net proceeds of about $7.31 per share after the two deals, which value the company at a 40 percent premium to the closing price on April 11, the day before rumours of a deal emerged, the company said.